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Bankings Impossible Italian Job

(Bloomberg) -- Monte Paschi is losing its head at the worst possible time. The bank's already trying to pull off a complex and risky plan to simultaneously raise capital and shed bad loans to avoid a painful state rescue. Now it's ousting its CEO.

To avoid snapping already stretched investor nerves, the replacement must be swift, credible and focused on addressing the obvious market doubts about the bank's latest promise to turn itself around.

Outgoing chief Fabrizio Viola assured investors in July that there "was no Plan B" -- no room for error. After failing European bank stress tests in spectacular fashion, Monte Paschi would raise 5 billion euros in capital (more than five times its depleted market value) and sell 28 billion euros of bad loans at a discount before the end of the year.

Never mind that this was the third time in two years that the bank, which boasts the worst non-performing loan ratio in Italy, had tapped markets for capital. Or that its share price shriveled by 95 percent under Viola's four-year tenure. After a series of false starts, assets were finally being marked down close to market levels.

But a glance at Monte Paschi's shares since then shows a clear lack of confidence that appears to have cost Viola his job -- and set a high bar for his successor. The stock's down 20 percent since the plan was announced, with the bank now trading at a price-to-book ratio of 0.1, the lowest in its European peer group.

The plan carries huge execution risk and lacks a credible backstop. It's taking place against a backdrop of political uncertainty as a referendum on constitutional reform, key to Prime Minister Matteo Renzi's future, looms. Larger rival Unicredit, on far surer footing, is said to be planning a capital increase of its own that might crowd out Monte Paschi's. There have been reports that Monte Paschi's plan may be delayed into 2017, or that it might be tweaked to include a debt-for-equity swap.

These are huge unknowns that Viola hasn't been able to lay to rest, despite his initial confidence. His replacement can't just have a long-term strategic vision, in other words. The new CEO must be able to juggle domestic politics, a global investor base, fraught financial markets and a cripplingly low valuation just to get through the next three months.

Names being thrown around include Bank of America Italy head Marco Morelli, who's certainly qualified though hardly a radical choice given his past role as Monte Paschi's CFO. Veteran Italian banker Corrado Passera might be a more aggressive choice, given his proposal of an alternate Monte Paschi rescue plan with UBS earlier this year that was ultimately rejected by the bank. But his past work in government may paint him as too political.

The stakes are high for Italy and Europe. Monte Paschi may be small but fixing it means removing a big source of uncertainty for the third-largest economy in the euro area. Clarity on the rescue plan, even if it means unveiling a "Plan B", is what's needed right now. The alternative -- a painful state intervention that would be politically and financially costly -- is a Plan C with stark consequences.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.